Almost two years after its interest rate-raising cycle began, the European Central Bank made its first cut on Thursday. The quarter-point drop from 4 to 3.75 per cent, which president Christine Lagarde had teed up in recent months, will give European borrowers some relief. The ECB followed through with what it had indicated, which matters for the credibility of the institution. It also made a pragmatic, precautionary move.
Central banking is about weighing up risks. Since the pandemic, the fear has been that rising inflation would spiral higher if rates were not restrictive enough. Slowly, the dynamics have shifted. Now, with inflation trending down and inching closer to 2 per cent across advanced economies, the impact of the high cost of credit on economic activity is receiving more attention. Keep rates too high, for too long, and inflation may fall too far — and take growth with it.
In the Eurozone, inflation has been gliding gently down towards 2 per cent all year, with a slight hiccup last month. Forward-looking indicators appear promising. Surveys of business sales price expectations point to a weakening in core inflation components ahead, as do falling wages advertised on postings tracked by Indeed, a jobs board.